Tuesday, May 02, 2006

Dow Chemical revised to BUY

I have always stated that I would rather have my ego bruised but wind up with the right stocks and our newest Wonk of the Day, C6H6 has put me in my place. After a lengthy back and forth about the calculations of Altman's Z-scores it turns out that I had missed a point about the different units of a set of weighting coefficients.

The overall result is that the Z-scores show DOW to be rather more healthy than I had previously posted, with a Z-score at a healthy 3. With this reassurance that DOW is healthy and previous analysis showing good discount rate and cash flow I am changing my call to a BUY and I will be buying some stock in this company shortly. For a feel of what a Z-score of 3 means here is a plot over time of what S&P rating different Z-scores have been equivalent to:


Plot of how rating agency ratings (data and fit lines) have followed Z-scores over time. Typically the agency ratings track this plot on a lag of about 3-years (that is to say that the Z-score is a predictor of the agency ratings). At this time Dow Chemical has a rating above 3, which is quite safe.

Thanks go out to all the readers who suggested paths to re-evaluate, even those that did not pan out. The entire goal of this site is to encourage critical review and arrive at the right answer.

Click back to the main page!

2 Comments:

Anonymous Anonymous said...

Thanks FW for the acknowledgement. I want to commend you for your open dialogue and for living your objective "to encourage critical review and arrive at the right answer".

I learned a good deal in this exchange. I hope for more of the same in the future.

c6h6

3:26 PM  
Blogger FinanceWonk said...

I do hope you'll stick around and help us get things right in the future as well. It's always painfull to find I've made an error but if we get a solid group of smart people arguing topics around here we are likely to come up with some good answers.

I look forward to seeing you as Wonk of the Day again some time. Contact me by email through my profile if you feel the desire to write a guest column some time :)

Cheers,

FW

4:20 PM  

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